Become a Bank With Peer-to-Peer Lending

Technology is changing the way we live our lives and disrupting many old industries.

This is happening even in the finance industry.

These new ‘FinTech’s’ as they’re called, are changing the way we borrow, shop, pay for things and even invest.

Change is the only constant as they say, so it’s best to keep an eye out for possible investment opportunities.

One in particular caught my eye a while ago, called Peer-to-Peer Lending.

What exactly is Peer-to-Peer Lending?

Well at the risk of sounding too simple, it’s exactly as it sounds.

Peer-to-Peer Lending is an online platform where borrowers and lenders are matched up, creating loans for an agreed period of time.

Think of it like a money match-maker!

It’s a lot like opening your own banking business, where you are lending your money to other people and businesses, receiving principal and interest payments in return.

The reason this technology is effective is because, by creating an online platform, the Peer-to-Peer Lending companies can operate at a much lower cost as they don’t have to rent large buildings and shopfronts filled with employees all over the cities, like banks do.

These cost savings mean lenders can earn higher returns rather than having their money in the bank.

On the flip-side, borrowers can borrow at lower rates with more flexibility, compared to a traditional lender.

The platform provider ‘clips the ticket’ on the way through and takes a fee out for matching the loans and doing credit checks on the borrowers.

Provision Fund

As each loan is approved, the borrower is asked to pay a fee according to how risky they are deemed to be.

Then, basically the fee is popped into a big security bucket called the Provision Fund.

If and when some of the loans go into default (which is inevitable with any borrower/lender situation) then the Provision Fund kicks in to cover the loss and the lender receives their regular payment and will be none the wiser.

This is no guarantee, but again RateSetter has shown to be quite prudent and have plenty of coverage in the Provision Fund, helping to ensure every lender has received their principal and interest payments.

To my knowledge, they are the only Peer-to-Peer Lender in Australia with a Provision Fund in place to protect lenders.

Transparency

One of the things I like about RateSetter, is how open they are with their data.

Generally, what you see is what you get.

They make available mountains and mountains of statistics and data about loans matched, default rates, provision fund balance, amount lent, average age and income of borrowers and lenders.

You get the idea.

A lot of people are pretty untrusting of financial companies (sometimes for good reason), so it’s refreshing when a finance company is open and transparent.

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4 comments

“…the Provision Fund kicks in to cover the loss and the lender receives their regular payment and will be none the wiser. … helping to ensure every lender has received their principal and interest payments. …”

This is not quite accurate (unless they’ve changed the T&Cs since I read them) – the provision fund will cover your initial investment, but they will not cover any missed interest payments.

When I spoke with them they told me how the defaults work. They explained the lender won’t know if a default has occurred, indeed defaults are already occurring and this is what happens. You won’t know anyone defaulted, you’ll receive your repayments as normal while they chase payment in the background.
Please see the stats down the page here https://www.ratesetter.com.au/peer-to-peer-lending 100% capital and interest returned as due so far, remember this is despite the ongoing defaults.
We are yet to see what happens in a catastrophic scenario where defaults are elevated though.

Thanks for this summary. For whatever reason I have been hesitant to try this out but it seems like it could be a good option. I am going to look into it some more as we are selling one of our properties so would want to park some money somewhere for a bit. The 1 month option could be a way for me to dip my toes in so to speak.

Glad it helped. It’s not without it’s risks of course, but it can be a good option for a multi-year timeframe versus an offset account.
Good job on the property sale, we will be offloading one shortly too 🙂